Banks exposure to the PIG debt: huge if you include the private sector

The total exposure of the international banking sector to the public debt of Portugal, Ireland and Greece is reaching EUR 82bn. But including the private sector, the total risk climbs to nearly 900bn.

According to BIS data, the consolidated foreign claims on the public sector of Portugal, Ireland and Greece (PIG) represent a total risk of EUR 82bn. This does not include the claims of mutual funds and insurers. The most important creditor on the public debt are the German banks (34bn) and the French banks (27bn). Those two countries concentrate 70% of the total exposure on sovereign bonds. UK banks (11bn, including 4.5bn of Irish bonds) and Spaniard banks (9bn, almost exclusively on Portugal) are also implicated.

But, this is only the tip of the iceberg. Adding the claims on PIG private debt, the total risk climbs dramatically to EUR 896bn. Half of it is coming from the Irish banks (85bn) and the Irish non-financial private sector (357bn). If you add to the Greek public sector, the claims on the private sector, the exposure of the German banks is reaching 30bn and 49bn for the French ones. Note that the US banks are not risk-free, as their exposure rise from 1bn to 31bn if we include the private sector debt.

Economic Impacts

A default over the Greek sovereign debt would trigger a bankruptcy for the local banking sector, and probably part of the non-financial private sector (massive credit crunch for the Greek private sector). For the international banking system, potential losses for French, German and US banks (+insurers) could easily lead to a new liquidity crisis in the interbank market, aka a new Lehman. Moreover, the contagion risk to Portugal and Ireland is so big that is could blow up the entire financial system. That’s the reason why a default is not an option for Greece.

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